For Capitalism to Work, Everyone Has to Think It’s a Fair Game

What will be the biggest challenge to capitalism in the next two decades—and what should be done about it?

KARL ULRICH: The biggest challenge to capitalism is the perception that the game is rigged in favor of the providers of capital. Capitalism works in part because we as a society grant corporations a charter to provide goods and services in exchange for earning a profit for their owners. Capitalism also requires a basic agreement among workers, managers and owners that the relative contribution of each constituency will be reasonably and fairly recognized.

In the last 30 years a remarkable shift in income distribution has occurred in the United States. In sum, the income of the bottom 75% of earners has increased by a few percent. (Contrary to popular belief, even the bottom 25% is slightly better off in inflation-adjusted terms than it was 30 years ago.) However, the most wealthy are phenomenally better off. For instance the top 1% went from enjoying about 10% of all income in 1983 to receiving more than 20% of all income in 2013.

It’s not that the bottom is worse off, but rather that the productivity gains in the economy accrued disproportionately to the highest income individuals, generally managers and providers of capital for corporations. That’s great for those folks as long as the charter is not revoked, and as long as the implicit contract among workers, managers, and owners remains intact. However, the threat to the status quo is that those at the bottom of the income pyramid will become more organized, demand greater equality in the distribution of income (most likely through tax policy), and possibly even fundamentally alter the nature of the charter society provides to corporations. Even purely self-interested providers of capital should see that greater perceived fairness is in everyone’s best interest.

Karl Ulrich is vice dean of innovation and CIBC professor of entrepreneurship and e-commerce at the University of Pennsylvania’s Wharton School.